Forming a Texas Corporation – Other Documents You Should Know About

 

Most folks forming a corporation are aware that you file a certificate of formation with the Secretary of State’s office in order to legally form the corporation and then adopt bylaws to govern the corporation’s day to day operations.  There are several other documents important to properly forming a Texas corporation that you should be aware of and I discuss several of them below.

Pre-Incorporation Agreements

Pre-incorporation agreements are those made between future shareholders regarding the formation of the corporation.  These agreements may be formal (preferred) or informal.  Pre-incorporation agreements vary widely but are often used if there is some concern that one or more shareholders may back out of their commitment to form the new corporation.   They are also used to document the future shareholders’ expectations with regard to employment, capitalization, management, and other terms.

In essence, the pre-incorporation establishes a joint venture between the parties for the purpose of forming a corporation and establishing its business.  The pre-incorporation agreement usually terminates upon formation of the corporation.

Subscription Agreement

A subscription agreement is defined as an agreement between a subscriber and a corporation or a written offer by a subscriber to a corporation, before or after its formation, in which the subscriber offers or agrees to purchased a specified ownership interest in the corporation. Pre-incorporation subscription agreements are irrevocable by the subscriber for six months unless otherwise agreed.  The subscription agreement will usually set forth the conditions of the subscription as well as the payment terms and timeline for the subscription.

These agreements are becoming less common because of the ease with which modern corporation can issue new shares in exchange for additional capital but they are still in use today.  One of the reasons they are still in use is to condition the subscriber’s obligation to purchase shares.  For example, the subscription agreement may condition a commitment from the subscriber to purchase shares upon the occurrence of some event, such as, the corporation securing debt financing, a total capital investment amount, a key customer, hiring a key employee, etc.

An important note: it is important for the corporation to be aware of State and Federal securities laws when considering a subscription agreement and issuing stock to an investor.

Buy-Sell Agreement

A buy-sell agreement sets forth the terms under which the corporation or the other shareholders of the corporation must purchase shares from an individual shareholder.  The agreement also sets forth the terms under which a shareholder must sell his or her shares back to the corporation or to the other shareholders.

The buy-sell agreement will usually contain specific trigger events that create the obligation to sell or purchase the shares.  Common examples of these trigger events include death, divorce, and dissociation.  The buy-sell agreement should set forth the manner of determining the price of the shares to be sold as well as terms for payment of the purchase price.  The buy-sell agreement may set forth different prices and payment terms for different trigger events.

The buy-sell agreement may be set forth in a separate written agreement or in another corporate document such as the certificate of formation, bylaws, or a shareholder agreement.

Shareholder Agreement

A shareholder agreement is a critically important document, especially for small or closely held corporations.  A shareholder agreement is a binding contract between the shareholders used to manage their relationship and the governance of the corporation.  The terms of the shareholder agreement may be the only recourse a disgruntled minority shareholder can rely upon to protect his or herself.  Likewise, majority shareholders may benefit from a shareholder agreement setting forth the shareholders’ agreement with regard to management, rights, duties, and standards of care.

The shareholder agreement is often used to modify the standard corporate governance laws in a number of areas by setting forth specific terms to govern issues such as those listed below:

  • placing restrictions on the transfer of shares
  • creating mandatory buy-sell provisions
  • establishing mandatory voting terms or altering voting rights
  • modifying fiduciary duties and standards of care for Directors and Officers
  • mandating dividend payments
  • setting forth restrictions, requirements, or terms for the employment of shareholders or their family members
  • protecting minority interest holder’s rights
  • modifying the reasons when a corporation may be wound up and terminated
  • setting forth methods for resolving management disagreements
  • mandating the election of specific directors
  • placing restrictions on the management authority or discretion of directors and officers
  • expanding the types of actions which require shareholder approval
  • mandating bylaw terms

Initial Organizational Meeting Minutes

As soon as the corporation is formed, the initial Directors must hold an initial organizational meeting although the meeting may be accomplished through a written consent.  Regardless of whether an actual meeting is held or action is taken by written consent, the initial organizational meeting is important to address the following business in addition to other matters:

  • adopting the corporate bylaws
  • electing officers
  • issuing stock and setting forth the consideration to be received by the corporation
  • adopting a minute book to document BOD actions
  • establishing corporate bank accounts
  • authorizing other significant actions such as borrowing money, significant contracts, or leases
  • adopting the corporate share certificate
  • approve the initial stock ledger

Assumed Name Certificate

If the corporation will conduct its business under a trade name or any name other than the one set forth on its certificate of formation, then the corporation must file appropriate assumed name certificates.  These certificates are filed at both the State and County levels.

Stock Ledger

The new corporation will also need to create its stock ledger.  The stock ledger will serve as the corporation’s official record of stock ownership in the event there is any dispute as to what shares the corporation has issued and who owns those shares.

Basic Estate Planning Issues for New Parents

The feeling of being a new parent is exhilarating, a little scary, and often very tiring – I know, I did it twice.  I still remember walking out of the hospital when my son was born thinking, “That’s it? They really just let me walk out the door and go home with him?”  Along with these feelings come new worries – what will your family do if something happens to you? Or god forbid, what happens to your new baby if something happens to both you and your spouse?  Planning for these concerns is what this article is all about.

There are a number of important estate planning matters that all new parents should address.  I’ve highlighted a few items below that any basic estate plan for new parents should address.  Obviously, some of the more unique or complicated situations might require a more complex plan and I’ve highlighted a few examples of those situations below as well.

Who will care for your child if you and your spouse pass away?

A new baby means the responsibility to care and provide for that baby – regardless of what happens to you.  Parents should absolutely make sure they have a will in place that designates a guardian for their child should they both pass away.  Parents should carefully consider whom they assign the responsibility to raise their child.  You should review the eligibility of the person you designate to serve as a guardian.  You should also consider their ability to fulfill the responsibility of raising your child, then consider and designate alternative guardians.

One consideration that often goes overlooked is financial ability.  How will you make sure the guardian you designate has the financial ability to provide for your children?

How would your family handle the financial burden of losing a spouse?

The loss of a parent is not just a traumatic emotional event, it can also be a traumatic financial event.  New parents should evaluate their income and develop a plan to provide financial security for a surviving spouse should either one of them pass away.  This likely includes life insurance.  You should evaluate what type of life insurance is best for your situation.  How much insurance do you need for each parent?

Remember – the surviving parent isn’t just replacing lost income.  The surviving parent will face increased child care costs, college costs, and medical expenses.  Health insurance costs may increase if the deceased spouse carried insurance through his or her employer.  Your financial planning should address not only lost wages but also other economic and non-economic contributions the deceased spouse provided that might increase the burden of caring for your surviving family members.

Who will you designate as executor to probate your will and carry out your final wishes?

It is common for spouses to designate each other as their respective executors.  But that may not be the best choice.  If your spouse survives you, he or she will be dealing with both the emotional toll of your loss as well as trying to heal the emotional impact on your children.  That is a heavy burden.  Your spouse may not need the added burden of administrating and settling your estate.  You should carefully consider whom you designate as executor, whether they are qualified, what your other options might be, and be sure to designate alternative executors if the first cannot or does not serve.

Are your retirement and other POD accounts are consistent with your estate plan?

Not all assets pass under your will or through the probate process.  For example, you may designate (or may have previously designated) a beneficiary on your retirement accounts who is entitled to those proceeds upon your death.  Many bank accounts also allow for POD designations.  You should make sure that any designations you make are consistent with your estate plan.  You should consider how those non-probate assets should be distributed to best care for your family and children upon your passing.

Do you need a trust for your children?

If both parents pass away, what happens to your assets?  Are they distributed directly to your children?   Are they put under the care of a guardian of your child’s estate appointed by a court?  Would you expect your child to be capable of handling what could be a significant financial windfall at the age of 18?  Or should they be held in trust for your child?

You should consider how and when you want your children to have access to any assets you leave to them, especially if there are significant financial assets.  You should also carefully consider whom you would want to manage and care for those assets until your children are old enough to manage their financial affairs themselves.  A trust allows you to do all of these things as well as provide rules for when and how trust assets will be spent caring for your children.

Do you have a plan that addresses your incapacity as well?

Death is not the only event your estate plan should address.  What happens if you become incapacitated and can no longer work?  Disability insurance is one idea to address the financial burden of lost wages. What about increased medical care? Child Care? Insurance? What about managing your assets, property, or business?

Do you have a durable power of attorney in place to manage your property and affairs? Do you have a medical power of attorney in place to designate whom you want making medical decisions for you if you become incapacitated?  Do you have an advanced directive in place to respect your wishes regarding end of life care?

If you own your own business, do you have a succession plan in place should you be mentally or physically unable to run the company?

Are there special circumstances that require more thoughtful planning?

The basic issues are fairly straightforward but parents should always consider any special circumstances that might warrant more careful planning.  For example, does your child have special needs that qualify him or her for government benefits?  If so, a special needs trust may be necessary to make sure that your child will not lose those benefits.

Unmarried parents present unique issues for consideration.  Do you or your spouse have significant debts that could impact your ability to leave sufficient financial resources for your spouse or children? Is there a family business that must be considered and care taken to ensure its survival?  Is there a possibility that you might receive a significant inheritance yourself?

All of these are special circumstances that warrant additional care and thought when developing your estate plan.

 

 

Tips & Resources for Homeowners Recovering from Hurricane Harvey

There are countless legal issues that will arise in the aftermath of Hurricane Harvey.  This article is aimed at providing some tips and resources specifically for homeowners with property damage requiring repair.  The first few weeks are about cleanup and recovery.  After that time the repairs begin and that is when a lot of homeowners can get into even more trouble.

The unfortunate truth is that a lot of contractors will descend upon areas devastated by natural disasters such as this.  The large volume of repair work needed combined with a lot folks in desperate situations is a breeding ground for fraudulent and criminal activity.  Invariably, fraudulent contractors come in, steal money, and get out before they are ever caught.  The homeowner ends up losing twice – once with the property damage and a second time with the money they thought they paying to have their home repaired.   Those most at risk from these types of predators include the elderly, those with limited English skills, and those with low income.

There is no way to guarantee you won’t fall prey to a bad contractor.  But here are some things you can do to increase your odds.

Tips to Limit the Risk that a Bad Contractor Will Take Advantage of you

  1. Be patient!  It’s tough to do that when your home has been destroyed or suffered significant damage and you just want a safe secure place to live.  But that desperation is exactly what bad contractors are hoping to take advantage of.  So be patient throughout the process – don’t make quick decisions.  Don’t be afraid to sleep on it or take a few days to think about a decision.   Finding the right contractor that will work with you on many of the issues below may take a lot of time but spend that time.  Believe me – you will regret your impatience if it leads to someone taking advantage of you.
  2. Always get multiple estimates.  Never sign an agreement with the first contractor you come across.  There can be significant differences in costs and estimates from one contractor to the next.  Take the time to learn about the range of prices and the differences in the estimates (or contractor’s method of business) that account for those differences in pricing.
  3. Avoid paying the contractor significant money up front.  It is not unreasonable for a contractor to require some form of down payment for supplies and materials when he starts work on your project.  But it also is not necessary.   It is certainly not necessary for the homeowner to put down a large fixed percentage of the total cost up front.  Or worse – pay in full up front.  If you have a contractor demanding you make such a payment – move on.  If you have a contractor pushing you for a down payment so he can “put you on his schedule” – move on.
  4. Always have a written contract for the work.  Never pay money to a contractor without a written agreement signed by both you and the contractor.  The agreement should specifically state the scope of work that the contractor is responsible for performing and the price for that work.  The contract should specify when payment is due – upon completion or periodically.  If periodically, then the contract should set specific bench marks for the contractor to earn each periodic payment.  More detail is better.
  5. Inquire whether the contractor will use employees or subcontractors.  Make sure the answer is stated in the contract.  If the contractor uses subcontractors, you must get lien releases from the subcontractors showing that the subcontractor has been paid in full at the time you make any payments.  If you do not then you risk the subcontractors filing a mechanic’s lien on your home for the work they performed if you pay the contractor and he does not pay the subs.  Make sure your obligation to make any payment is contingent on receiving those releases.  Make sure the subcontractors are licensed, insured, and bonded.
  6. Home Equity Loans.  You may need a loan to repair your property and this is not uncommon.  However, do not allow the contractor to push you into that decision or “recommend” a lender to you.  It is an all too common scam for a contractor to induce a homeowner into securing a home equity loan, then take the loan proceeds and leave with out performing any work.  This leaves the homeowner with a loan payment, a lien on their house, no more equity, and the repairs still need to be done.
  7. Verify the contractor.  This means check his license.  Check his liability insurance.  Check his workman’s compensation insurance.  Check his Better Business Bureau rating.  Is the contractor bonded? Ask for referrals – and contact those people.  Verify the contractor’s address – a lot of contractors will chase storms from out of state.  You are less likely to run into trouble if you work with a local contractor that has a long history of successful services in your area.  If he is using subcontractors, ask for their credentials.
  8. Get a firm start date and time estimate.  Then put it into the contract.  It is not uncommon for the start date to slip a few days or even a week or two.  But address that possibility in the contractor and secure a right to walk away from the contract if the contractor does not begin work on or before a certain date so that you are not stuck waiting.  See #3 above – do not make any payment prior to the date the contractor actually begins work.  Also – get a firm estimate on the time to complete the work.  See #3 above – do not pay your contractor in full before the work is done and you receive all lien releases (see #5).  Do not pay the contractor on anything but the agreed upon schedule under any circumstances.  If you properly addressed the payment schedule in your contract then this will provide you with some protection should the contractor leave mid-job.
  9. Here are some additional miscellaneous red flags.  Contractors soliciting door to door.  Out of state contractors.  Contractors using P.O. Box addresses.  Contractors with no history that you can locate.  Contractors with phone numbers from a non-local area code.  Contractors who cannot or will not address any of the issues above.

Additional Resources for Homeowners Recovering from Hurricane Harvey

Below are links to some additional resources:

  1. State Bar of Texas Disaster Recovery Manual
  2. State Bar of Texas Disaster Relief Page
  3. Federal Emergency Management Agency (FEMA)Hurricane Harvey Page
  4. Office of the Governor Hurricane Page
  5. Office of the Attorney General Consumer Protection
  6. Texas Association of Builders (with more information on choosing a reputable contractor)
  7. City of Houston Disaster Recovery

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